The End of an Era: The Demise of the Chapter 313 Texas Economic Development Act
by Kelley Rendziperis, on Feb 14, 2023 9:30:00 AM
The appraised value limitation under Chapter 313 of the Texas Tax Code, commonly referred to as the Texas Economic Development Act, expired on December 31, 2022. Despite a multitude of pleas and even legal action to prevent the program from expiring or, at a minimum, allowing applications filed prior to the deadline to be considered by the Texas Comptroller of Public Accounts (Comptroller), the Texas Supreme Court declined to intervene and the program expired. There are several other economic development programs at the state and local jurisdictions’ disposal but this particular incentive was vital in attracting capital-intensive projects and may hinder the ability to win these projects in the future.
Chapter 313 overview
The Texas Economic Development Act (Chapter 313), created in 2001, allows taxpayers and school districts to enter into an agreement for an appraised value limitation in exchange for large capital investments and job creation. The limitation value varies by school district and is a 10-year limitation on the school district maintenance and operations tax (M&O) applied to the taxable property value exceeding the limitation.
One of the school districts with the most active Chapter 313 agreements is Barbers Hills Independent School District located in Chambers County, Texas. The current limitation amount is $80 million, meaning that any portion invested above this threshold amount will benefit from the limitation. Thus, the school district still collects 100% of its tax millage on the first $80 million of investment and only exempts the M&O portion of its overall rate on the taxable amount in excess of $80 million. In addition, the school district receives negotiated supplemental payments from the taxpayer in exchange for entering into such an agreement and the remainder of the missing school district revenue is funded by the comptroller.
The results of Chapter 313 agreements
The Comptroller issued its Biennial Report on the performance of Chapter 313 as of June 1, 2022, reporting the following for the 598 current and executed agreements:
- 35% are manufacturing and 65% are renewable energy. Less than 1% were in research and development
- Of the estimated $261 billion invested under the 598 agreements, 71% of the investments are in manufacturing and 29% are in renewable energy; less than 1% are in research and development
- Of the 9,850 qualifying jobs committed for creation, 88% are in manufacturing, and 12% are in renewable energy
- Of the estimated gross tax benefit of $12.3 billion, manufacturing projects are estimated to receive 73%; renewable energy projects, 26%; and research and development, less than 1%.
Criticism of Chapter 313
The primary criticism of Chapter 313 is that it is intertwined with the state’s public school system, the lack of transparency and accountability and other typical condemnations by opponents of economic incentives in general. There are certain projects that many believe would have located to Texas without being offered this benefit based on their need to locate within Texas from a natural resources perspective. In 2021, the Texas Legislature failed to address the impending expiration of Chapter 313 and Gov. Greg Abbott declined to issue a special session specifically for this matter, resulting in the program expiring on December 31, 2022.
The future of Chapter 313
What happens next is anyone’s best guess. At the time of this blog, no legislation was formally filed for consideration in the current legislative session. However, it is expected that we will see multiple bills introduced. Since Texas has one of the highest property tax burdens in the country, something will need to be done to continue to compete for investment. While there is an ability to negotiate property tax benefits with cities, counties, and/or special districts, the school district millage consists of more than half of the total tax rate.
Samsung and Tesla were beneficiaries of this significant program, and both have stated they would not have located in Texas without this benefit to assist in offsetting property tax liabilities. Furthermore, we learned of real examples, such as Intel and Micron, which located elsewhere based on the substantial cost differential. Even with the benefit of Chapter 313, other states can offset up to 100% of property taxes and/or do not tax manufacturing equipment, personal property or inventory, while Texas taxes all those items.
While we don’t know exactly what a replacement will look like, based on the experts, it will likely not be named similarly and not be as deferential to school districts. In addition, it will continue to require an out-of-state competing location, require the creation of more jobs and encourage the growth of more general manufacturing operations.
With 416 applications filed during 2022, exceeding the total number of applications filed in the three previous years combined, it is obvious that this economic development tool is a necessity for Texas to remain competitive. This tool is not only important to recruit new projects, but also to encourage expansions by businesses already operating in the state. SSG will continue to monitor the legislative session over the next few months.
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